Inflation is a growing concern for businesses and consumers alike, and as rising prices can erode purchasing power and reduce overall economic growth, an emerging trend for companies is the use of premium pricing.
Premium pricing or “premiumization” is when companies charge higher prices for their products or services to maintain profitability. Over the past year, premium pricing is becoming more common as companies grapple with rising input costs, including raw materials, labor, and transportation.
That said, many restaurants are raising menu prices to offset the higher costs of food and labor. Krispy Kreme, for one, plans on fewer discounts in the coming year, instead pushing premium specialty donuts.
Similarly, retailers charge more for goods as they face higher shipping and logistics expenses. Companies in other industries, from healthcare to technology, are also adopting premium pricing strategies to maintain margins in the face of inflation.
While premium pricing can help companies stay afloat in challenging economic conditions, it can also negatively affect consumers. As products become more expensive and exclusive, large sections of the economy are at risk of becoming “gentrified,” in the words of the New York Times. Higher prices can reduce demand for goods and services, particularly among price-sensitive consumers. This can lead to lower sales volume and revenue for businesses, ultimately impacting their profitability and viability.
Moreover, premium pricing can exacerbate income inequality, as those with lower incomes are less able to afford premium-priced goods and services. This can create a two-tiered economy, where wealthier consumers can access higher-quality products while lower-income consumers are priced out of the market. Companies such as American Express are heavily focusing on high earners, steadily limiting their focus to higher-earning applicants.
However, the concerns about poorer consumers being increasingly underserved are still genuine. Many companies have long segmented customers, targeting richer ones into more profitable purchases. But the trend picked up during the pandemic, with a wider array of products and services receiving luxury treatments - and now, poorer consumers might be left in the lurch.